Strother v 3464920 Canada Inc is a June 2007 decision of the Supreme Court of Canada that deals with the issue of conflict of interest for lawyers. This decision is the third in a line of decisions on conflict of interest issues (MacDonald v Martin Estate (1990) and R v Neil (2002)).
The basic facts of the case are:
- Strother was a partner in the firm Davis & Company
- 3464920 (‘Monarch’) was in the business of devising and marketing tax shelter investments
- Strother provided advise to Monarch with respect to the tax shelters and had an exclusive retainer to do this
- Strother’s retainer terminated at the end of 1997
- The Department of Finance terminated the tax shelter provisions in November of 1996 so that Monarch’s tax shelter business was winding down by October of 1997
- Monarch continued to retain Davis to provide general corporate advice but did not ask for further work on tax shelters
- January 1998 Strother was approached by Sentinel to seek a ruling with respect to possible tax shelters
- Strother entered into an agreement with Sentinel that provided him with a portion of profits if the ruling was successful
- A favourable tax ruling was issued in October 1998
- Strother did not advise Monarch of this ruling
- Management of Davis advised Strother that he could not have an ownership interest in Sentinel
- Strother resigned from Davis in March 1999 and became a 50% shareholder in Sentinel
They were unsuccessful at trial but successful on appeal and the Court of Appeal ordered Strother to disgorge to Monarch all of his profits and benefits.
A 5 to 4 majority found that Strother had an obligation to advise Monarch of the favourable tax ruling and that he failed to do so because of his personal economic interest in Sentinel. He was obliged to account for his earnings from Sentinel minus reasonable costs related to those earnings.
Davis was not found to have committed any wrong and therefore had no direct liability but had vicarious liability with respect to damages incurred while Strother was a partner.
The basis for the Court’s decision is in para 34:
When a lawyer is retained by a client, the scope of the retainer is governed by the contract. It is for the parties to determine how many, or how few, services the lawyer is to perform and other contractual terms of the engagement. The solicitor-client relationship thus crated is however overlaid with certain fiduciary responsibilities, which are imposed as a matter of law.
The majority and minority decision use the retainer as the starting point for the analysis but come to opposite conclusions. The majority says that the 1998 retainer entitled Monarch to be told that Strother’s previous negative advice (delivered in 1997 regarding the viability of tax shelters) was now subject to reconsideration. They find this despite saying later on that “generally a lawyer does not have a duty to alter a past opinion in light of a subsequent change of circumstance.” The decision then proceeds to find that the 1998 general retainer to deal with commercial matters had an implied obligation to explain to Monarch that Strother’s earlier advice had been overtaken by events and should be revisited.
The Chief Justice says that the retainer is a purely factual question and that “It is not a conflict of loyalties in the abstract that raises problems, but conflicting duties – duties that are determined by the retainer.” She accepts the trial judge’s finding that the retainer regarding tax shelters had ended that that Strother then did not have a conflict (it is an interesting question as to whether she does this out of deference to the trier of fact’s conclusion or because of her own judgement).
On the issue of duties then both majority and minority look to Strother’s specific duties to his first client. The duties to the second client are reviewed to determine whether there is any conflict. In the case of the majority they then looked to Strother’s outside activities to determine whether those conflicted with the duties to the client. I think that in this decision they have begun to back away from some of the wider interpretations of the duty of loyalty that were arising from their previous decision in Neill.
The issues of damages is a complex one but it may be summarised as saying that even though Monarch did not suffer a loss and led no evidence that they would have returned to the tax shelter business the majority concluded that in order to deter breaches of fiduciary duty is was appropriate that Strother should disgorge the profits (revenues minus reasonable expenses) related to the enterprise that gave rise to the conflict. This begs the question if there had been no profit then would Monarch receive nothing.
